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Davis on Derivative Suits

Kenneth Davis’ new paper, The Forgotten Derivative Suit, reports on “a review of the 294 reported derivative suits decided in the federal and Delaware courts from 2000 through the first quarter of 2007.” According to Davis:

The results reveal that the role played by derivative litigation today varies widely with the kind of corporation and misconduct involved. For the types of misconduct typical of large cap, widely held corporations, other institutions now perform much of the deterrent function historically associated with derivative suits. As a result, the fact that few of these suits survive a motion to dismiss is often consistent with the shareholders’ best interests, given the cost of litigation. For smaller firms with controlling shareholders, on the other hand, derivative suits continue to perform a unique function. Courts have therefore needed to be creative in providing minority shareholders the means to relief, notwithstanding the dictates of the restrictive approach.

This is a very important finding and, as such, a very useful paper. It’s recommended reading.